Air NZ says Freedom Air not for sale

By NZPA

Thursday 27th February 2003

Air New Zealand today rejected arguments it should offload its budget carrier Freedom Air to get its proposed alliance with Qantas past competition regulators.

After announcing a turnaround in fortunes with a half-year net profit of $93.9 million, the airline also said it planned to extend its no-frills Express Class to trans-Tasman and south-west Pacific routes.

During the period, Air NZ agreed to a deal for Qantas to inject $550 million in new capital by buying a 22.5 percent stake and successfully launched its Express Class on domestic routes.

The planned alliance is before regulators, with critics such as Australian budget operator Virgin Blue arguing it will lessen competition. Virgin Blue, which has its own plans to fly to and within New Zealand, has submitted it should be allowed to buy Freedom Air, which flies trans-Tasman routes, as a condition of the deal going ahead. But Air NZ chairman John Palmer said there was no intention or need for his company to offload Freedom Air.

He said the combination of the Qantas alliance, Express Class and Freedom Air was critical to Air NZ's future.

"(Freedom Air) is an integral part of our business.

"We think the case we have put to the regulators is compelling. We are aware of others' comments, but for us it is important for our business."

Air NZ's latest half-year result compared with a loss of $376 million for the six months to December 2001, when write-downs from the collapse of Australian unit Ansett took their toll.

Revenues were up 2 percent to $1.84 billion, while costs were down 8 percent to $1.43 billion. Earnings before interest and tax (ebit) totalled $150 million, up $201 million, while cash flow from operations was $326 million, up $514 million.

Despite the company's return to comparative health, shareholders will not get a dividend.

Mr Palmer said the board was pleased with progress being made, but "there is much still to be done".

He said the strength of the New Zealand dollar and the easing of fuel prices had been a help, but management had to be careful in taking credit for those factors.

However, it could take credit for strong passenger growth and for controlling costs.

The company was holding to its December forecast for a full-year net profit before unusuals and tax of $230 million, despite a fall in bookings for next month and uncertainty over Iraq. March bookings were down 10 percent, particularly in the American and Japanese markets, but showed recovery again in April and May.

A rights issue was still being planned, but the timetable had been put back from the first quarter to the first half of 2003. Meanwhile, chief executive Ralph Norris said the Express Class had been so successful domestically that it could be extended to some overseas services by the latter part of this year.

There might be some modifications in the service provided to take into account the longer flying times. Mr Norris said Express Class on Tasman routes would not be in competition with Freedom Air because different products were being provided.

Freedom Air was a point-to-point airline flying between secondary airports, he said.

Express Class offered passengers added value in connections with other flights, access to the frequent flyer programme and use of airport lounges.

Mr Norris said Air NZ had increased its domestic market share to about 77 percent since the introduction of Express Class.

Of Virgin Blue's call for it to be allowed to buy Freedom Air, Mr Norris said: "I don't see the justification for giving somebody a monopoly in a product segment.

"I think that is effectively what Virgin Blue is asking for."

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